If you had filed back taxes for multiple years and received a request for additional time by the Internal Revenue Service to process one or more of your returns, you may have been inclined to agree – unaware of your rights as a taxpayer. If you’ve received such a request from the IRS, don’t respond until you’ve spoken with a professional tax consultant.
There are times in which the IRS taking more time to process your returns could benefit you; as a matter of fact, there are some situations in which the taxpayer is the one requesting an extension for the purpose of keeping a file open to have the prospect of filing a claim or getting a tax return. More often than not, however, the IRS taking more time to process your return only results in higher interest having accumulated over the extra time or giving the IRS more prosecution power against you.
Certain statutes of limitations in US tax laws extend the IRS a maximum number of years to process income tax returns. Section 6051(a), for example, allows the IRS up to three years from the date a return was filed (postmark date on mailed returns or date received electronically) to have a complete assessment of tax prepared. Other subsections of 6501 like 6501(c) (willful regard, failure to file, willful evasion, etc) and 6501(e) (omission of substantial information, generally 25% or more of gross worldwide income) stipulate that certain behaviors of the taxpayer or information contained in (or missing from) a tax return could result in a six year statute of limitations or a complete removal of the tax related statute of limitations altogether.
Acceptable Exceptions to Statutes of Limitation
The statutes of limitations defined in Section 6501 of the American Tax Code may be extended if the IRS and the American Taxpayer come to an agreement as defined in Section 6519(c)(4). While there are exceptions that can be made, an agreement must be made in writing between the IRS and the taxpayer to extend the statute of limitations. The IRS then has whatever additional time was agreed upon and is legally able to process your tax return at any point in time before the date outlined in the agreement. If a new extension is required by the time the original extension agreement expires, an additional agreement may be reached in accordance with Section 6229(b)((I)(B) if both parties are willing.
Forms Required to Extend Processing Statute of Limitations
The type of agreement the IRS is requesting and your level of willingness to oblige will both play a part in determining the proper form you will need to file. The possibilities are:
Form 872 – Consent to Extend the Time to Assess Tax:
A general consent form which may be used to establish a target tax assessment date on either one tax return or multiple years of tax returns. Either way, there is a specific maximum date established for which a tax assessment must be made by the IRS. If Form 872 is being used to set a target assessment date for multiple years, the date agreed to on Form 872 may be over the standard 3 year statute of limitations for earlier years and under the 3 year statute of limitations for later years.
Form 872-A – Special Consent to Extend the Time to Assess Tax
A more open-ended agreement which does not have a specified target assessment date and is active until terminated by:
- The taxpayer mailing the IRS a notification of consent termination or otherwise electing to nullify the agreement,
- The IRS mailing the taxpayer a notice of deficiency, or
- The IRS having fully assessed the taxpayer’s liability.
If the agreement is terminated either by the IRS or by the taxpayer before tax assessment is complete, it will remain active for a period of 90 days from the date of the notice of consent termination having been filed.
If there are minimal questions at the IRS about your tax return(s), a full examination by the IRS has been conducted, you have resolved all other tax issues, and your IRS representative was able to gain approval from an appropriate officer, you may enter into a restricted consent with the IRS. A restricted consent only allows an extension of the tax assessment statute of limitations for specific items on your tax return. To terminate a restricted consent, you must file Form 872-1, Notice of Termination of Special Consent to Extend the Time to Assess Tax. For more information about restricted consents, refer to Internal Revenue Procedure 68-31.
To Consent or Not to Consent
Making the decision on whether or not it’s a beneficial move to consent to a tax assessment extension requires an evaluation of your tax position. There are so many factors to be considered that it’s impossible to offer a definitive answer on the most advisable route. Some of the top considerations for making your decision include and may not be limited to:
- Whether or not you have or expect to have any tax liability
- The motivation(s) of the IRS for requesting a tax assessment extension
- The number of items on your US income tax return(s) which are subject to investigation by the IRS
- The accuracy of each item on your US tax return(s)
- The documentation you have (or lack) to support each item of your US tax return
- The current and potential future interest accrual on your tax debt
- The possibility of being able to file a claim or otherwise being eligible for a refund
It is your right to decline a request by the IRS to extend the statute of limitations on processing your return(s). If you refuse the IRS’s request, the most likely result is that a notice of deficiency will be issued. A notice of deficiency is a letter from the IRS explaining to you one or more discrepancies or potentially false items on your US tax return. This could be the result of not reporting all income, improperly filing forms, claiming excessive deductions, or another seemingly suspicious item. The IRS tends to use the threat of issuing a notice of deficiency as a means of convincing you to agree to a processing extension. If all is well with your tax return(s), however, this threat is simply a promise to get things resolved more quickly by a higher authority.
Contrary to popular belief, receiving a notice of deficiency is not the worst possible scenario. If you followed American tax laws and regulations when filing your tax return and you’re able to back up every item, receiving a notice of deficiency is nothing more than an opportunity to have the Tax Court review your return(s) and accompanying documentation for accuracy. If you have every reason to believe that your return is correct and contains all valid and legally deductible information, you will be able to file a petition for the Tax Court to review your case within 90 days of having received the notice of deficiency from the IRS.
If you were less than honest on your tax returns or you are willing to stop interest from accumulating by making a payment now and filing a claim for a refund later, you can also make the choice to pay the disputed amount. If you decide to pay the additional balance assessed by the IRS but you disagree with its decision, you will have the option of filing a claim for a refund in a court designed to enter judgments on US tax related issues.
Another consideration about filing a false return is: The IRS has a limited amount of time to perform due diligence and meet its burden of proving that one or more items on your tax return is fraudulent. In some cases, this proof cannot be gathered in time so a request for additional time to process is submitted to the taxpayer in hopes of gaining legal authority to search for proof of fraud beyond the scope of its legally established timeframe.
If you refuse to authorize an extension, the IRS will issue you a notice of deficiency. You can pay the balance, get your file processed and closed out, and take away the power of the IRS to continue to investigate you. Realize, however, that the IRS has a few penalties with which you can legally be assessed to increase your tax liability such as the negligence penalty and others. This may be a small price to pay, though, for preventing future criminal pursuit. Remember, if this is the motivation of the IRS and you allow them more time to investigate you, there will no longer be a statute of limitations and they will maintain the power to investigate and prosecute you until the time of your death.
In most cases – whether you actually owe the IRS more money or you paid exactly what you owe and can prove it – the best course of action is to refuse a processing extension and let the IRS send you a notice of deficiency. If you truly have more tax liability than that to which you admitted on your US tax return(s), prolonging the inevitable by allowing the IRS to take its time processing your return(s) will be a costly decision – both legally and financially. In order to understand why, it’s important to understand some basics of IRS procedure.
Mail is sorted at IRS locations and forwarded to the appropriate departments and representatives. If a number of questions arise on a tax return, it is set aside and time is devoted to processing incoming tax returns with less questionable items. As these ‘suspicious’ returns begin to pile up representatives become overwhelmed with work, so they begin to request more time from each taxpayer for returns on which a completion date may be difficult to determine.
When a taxpayer agrees to an extension, he/she is essentially agreeing to have his/her file placed at the bottom of the pile for an indefinite period of time – a period during which multiple types of interest will be accruing regularly. While there are certain interest abatement procedures outlined in the Tax Reform Act of 1986 allowing a discretionary reduction of certain types of interest, it’s no guarantee that you will qualify for such a reduction or that your representative will even consider it as an available option for you.
The only real circumstances in which it’s beneficial (or at best non-punitive) for the taxpayer to agree to allow the IRS more time to process one or more tax returns is when a refund can be expected. If you allow a processing extension, you will have a period of up to 6 months after tax assessment of your return(s) to claim a refund for each qualifying year.
If you are involved in or receive distributions from a partnership that is under investigation by the IRS, you may receive a request for additional processing time so the IRS can fully complete an investigation which may only slightly affect your tax liability. If this is the case, sitting and waiting for a decision could wind up costing you more money. Conversely, it may help you save money. Unless you’re fully aware of the internal practices of the partnership being investigated, it’s difficult to say. If you do allow the IRS more time to process your return, try to allow a restricted consent. If you’re not sure what steps you should take, talk to qualified tax professionals as soon as possible.
Current Tax Law Developments
There is currently a debate between the IRS and the Tax Court regarding the cost of litigation. The IRS believes (Tax Court does not) that taxpayers who refuse the IRS additional time to process their tax return(s) are creating a cause for frivolous litigation. Frivolous litigation is a term used to describe litigation as a measure that could have been prevented by exhausting all other possibilities. While the Tax Court currently disagrees with the IRS’s perception of a processing extension qualifying as an exhaustible possibility, it’s impossible to know how long it will maintain this decision.
Increased measures by the IRS to track down non-compliant international taxpayers is increasing the workload of IRS representatives, despite the fact that it’s hired hundreds (if not thousands) of new employees in recent years. As such, the odds of more processing extension being requested for processing multiple years of back taxes are increased.
With the ever changing tax laws, it’s hard to anticipate what your best course of action will be in the event of a request for more processing time by the IRS. With each decision, there are certain steps which must be taken to ensure you keep your tax liability as low as possible. To make sure you take all the right steps toward resolution of your US tax compliance, speak with an experienced international tax expert at Taxes for Expats.